Diana Kool discusses the potential impact of climate change on the global economy and financial markets, focusing on energy sources and the growth of renewable forms

1. www.financialworld.co.uk February / March 2016 51
References
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atistics/Key%20Facts%202015.pdf.
Allianz 2012, Nat Cat risk on the rise. Available at:
www.allianz.com/en/press/news/business/insurance/news_2012-11-
06.html/.
Botzen J, Aerts J and van den Bergh J (2009), ‘Willingness of
homeowners to mitigate climate risk through insurance’. Ecological
Economics, 2,265-2,277.
CISL (2015), Unhedgeable risk: how climate change sentiment
impacts investment. The University of Cambridge Institute for
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www.cisl.cam.ac.uk/publications/publication-pdfs/unhedgeable-risk.pdf
Prudential Regulation Authority/Bank of England, The impact of
climate change on the UK insurance sector. Report , 2015.
Ranger N and Surminski S (2013), ‘A preliminary assessment
of the impact of climate change on non-life insurance demand
in the Brics economies’. International Journal of Disaster
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SurminskiS(2014),‘Theroleofinsuranceinreducingdirectrisk:the
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SurminskiSandEldridgeJ(2015),FloodinsuranceinEngland:an
assessment of the current and newly proposed insurance scheme in the
context of rising flood risk. Forthcoming. Available at:
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assessment-of-the-current-and-newly-proposed-insurance-scheme-
in-the-context-of-rising-flood-risk/.
Swenja Surminski leads the climate risk and insurance
workattheGranthamResearchInstituteattheLSE.She
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includingrolesatMunichRe,MarshMcLennonandthe
Association of British Insurers
Fuelling the energy debate
Diana Kool discusses the potential impact of climate change on the global economy and
financial markets, focusing on energy sources and the growth of renewable forms
The recent floods in the UK have concentrated minds on the climate
change debate but the issues go beyond local politics. Whether or not
individual policy makers believe that climate change is taking place
– and that the world economy needs to adapt – the recent adoption of
the 17 sustainable development goals (SDG) and the agreement
reached at the UN Climate Change Conference (COP21) in Paris at
the end of last year signal a potential step-change in global climate
policy. They also signal changes in the global economy.
The SDGs propose targets for all countries equally, which include
tackling climate change, gender inequality and human rights
violations. In the past, developing countries were considered
primarily as passive recipients of world aid. That has changed. One
reason for this is that developing countries have gained much
influence in the negotiations during the past decade.They took centre
stage during the Paris climate talks, advocating stronger
commitments to carbon emission reductions.
Far from being passive, many developing countries are already
actively pursuing a low-carbon economy or have set out
commitments to do so in their “intended nationally determined
contributions (INDCs)” submitted before the Paris negotiations.
INDCs are what a country, given its domestic circumstances, aims to
do to combat climate change and limit future risks.
The thesis used to be that fossil fuels were the only path to
alleviating poverty and boosting economic growth in the “global
south”. Now it is being argued that their use would simply increase
climate volatility, thereby deepening vulnerability to poverty.
Widespread energy access and energy security are vital for
development. The World Energy Outlook 2015 estimates that 1.2bn
people worldwide are without access to electricity, of whom 700m
are in Africa, and that more than 2.7bn people rely on burning
biomass for cooking,
which causes harmful
indoor air pollution.
Those in developing
countries who do have
electricity are often
subject to an unreliable
supply and volatile
prices.The International EnergyAgency (IEA) suggests that between
250 kWh and 500 kWh a year should be sufficient for a newly
connected household.
According to World Bank data, countries with an income per
capita higher than $10,000 have an annual electricity consumption
of 3,880 kWh and more. Were developing countries to reach that
consumption figure a year per person, global electricity
production would have to climb 60 per cent. Were they to get to
one half of the US level, which was 13,240 kWh in 2011, global
electricity production would rise 130 per cent. With such a
potential surge in energy consumption, how that energy will be
generated, and financed, is a significant topic of debate. The
biggest question on everyone’s mind is whether or not COP21
will really mark the end of the fossil fuel era.
Developing countries
now have more
influence in climate talks

2. 52 February / March 2016 www.financialworld.co.uk
The developed world built its energy networks, and its wealth, on
coal, oil and gas. Some people have long argued that the “global
south” might leapfrog the stages of energy use seen in the north. That
idea was derided – until recently. Now it has begun to seem not only
possible for the “global south” to develop using renewable energy
but inevitable. If it does not happen, the economic cost could be
significant. Mark Carney, the governor of the Bank of England, for
example, gave a speech in 2015 warning insurers and investors of the
potential losses of stranded assets and the costs of climate change-
related damages, sending shivers through the global market.1
Carney is not alone in his concerns about the potential impact of
climate change on the economy and on financial markets. A survey
by the New York-based Institute for Policy Integrity (IPI) showed
that many leading US economists believe economic models
underestimate the impact of climate change; they support climate
action in the form of carbon tax and green technologies.2
Of those
surveyed, more than three-quarters believed that climate change
“will have a long-term, negative impact on the growth rate of the
global economy”.
The basic question for economists, as the IPI survey pointed out,
is how to “balance the costs of action and the likely economic
damages from inaction”. There is already a transition to renewable
energy sources, particularly in developing countries. The World
Energy Outlook reports that renewable energy accounted for almost
half of all new power generation built in 2014 and Fatih Birol, IEA
executive director, commented upon the report’s publication that
renewable energy currently accounts for 60 per cent of new
investments. This is despite fossil fuel subsidies being four times
higher in G20 countries alone than subsidies for renewable energy
globally, according to the Overseas Development Institute. Moreover,
growth in demand for solar energy has not slowed and solar power
is becoming increasingly cost-competitive, even in the context of low
oil prices.
From the current low of 30 US cents per watt for solar power,
Deutsche Bank projects a further reduction in the cost of solar energy
generation of 40 per cent over the next four years.
According to the IEA,
these cost reductions and
the pledges made in the
INDCs will lead to nearly
45 per cent renewable
penetration by 2030 – up
from one-third today.3
It
should be noted that the growth of renewables has consistently
outperformed the IEA’s estimates and that this is also expected in the
future, particularly given the exponential growth rates that
technological innovation can drive.
In order to implement the INDCs agreed at the Paris conference,
an estimated $13.5tn in investment is required. It is unclear what
Climate change ‘will
have a negative impact
on global growth’
impact real scale in renewable energy technology would have on the
costs – it should make them lower – but there are concerns that many
of the world’s poor will continue to have to burn fuels such as coal,
especially in parts of Asia. A report, published in the Proceedings of
the NationalAcademies of Science (PNAS) supports this conclusion,
adding that ambitious climate change targets would probably become
unfeasible if such a trend persisted.4
Nevertheless, China and India,
the two biggest coal burners, have cited the use of coal – albeit using
more efficient technologies – in their INDCs. This has been widely
criticised and the World Bank has rejected the idea of coal as a
solution to ending poverty outright.
On the flipside, data collected by Bloomberg New Energy
Finance show that China was the biggest investor in renewables in
2014 and 2015 globally and India recently announced the
International SolarAlliance, committing itself to achieving 175GW
of renewable energy by 2022 and 350GW by 2030, compared with
36GW current installed capacity. The country aims to push total
power generation capacity from 275GW today to 850GW by 2030
to improve energy access and security for its population of 1bn.
Africa also aims to double its renewable energy in the next four
years, with the help of funding from France. During the Paris
climate talks, President François Hollande announced that France
would increase renewable energy investments in Africa to €2bn
between 2016 and 2020. These are positive signals, which could
imply that the IEA has underestimated the lure of renewables over
fossil fuels.
There are solid economic, social, political and environmental
reasons to opt for renewable energy, specifically in developing
countries. Where developed countries have to replace old energy
infrastructure, many developing countries have a great opportunity
to leapfrog to renewables. By so doing, they would avoid “locking
in” high-carbon technologies in long-lived plant, equipment and
infrastructure and also avoid the costs of the potential premature
retirement of such infrastructure were low-carbon policies to be
implemented. The “leapfrogging” is open to them because wind
and solar are easily deployable, something that is important in
countries that lack a large educated workforce and major
infrastructure. Solar and wind do have relatively high upfront
installation costs but they can generate power more cheaply over the
lifetime of a project and prices continue to fall.
Finally, renewable technologies operate at much higher energy
efficiency than coal or oil. The Copenhagen Centre on Energy
Efficiency estimates that investment in improved efficiency of
renewable energy generation and electrical machines and devices
could lead to a 25 per cent reduction in demand for energy by 2030
alone. According to the International Partnership for Energy
Efficiency Cooperation, more efficient heating and cooking
appliances, and the use of more efficient energy sources in industrial
processes such as concrete and steel production, represent a so-
called “hidden fuel” that has the potential to contribute to up to half
the savings in greenhouse gas emissions set by the G20.
A reduction in the cost of energy generation is not the only
important economic impact of renewables. A recent study
conducted by scientists from Stanford University showed that a
renewable energy transition could save further $25tn-$50tn a year
in health and climate costs, and that it could generate more than
1. Carney, M (2015), ‘Breaking the tragedy of the horizon – climate change
and financial stability’. Speech given 29 September. Available at:
www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx.
2. Howard P and Sylvan D (2015), ‘Expert consensus on the economics of
climate change’. Institute for Policy Integrity, New York University School
of Law. Available at: www:policyintegrity.org/files/publications/
ExpertConsensusReport.pdf.
3. IEA/OECD (2015), Energy and climate change. World energy outlook
special briefing for COP21.
4. Edenhofer O, Jakob M, Steckel J C, (2015), ‘Drivers for the renaissance
of coal’. PNAS 112 (29), E3775-E3781.
CLIMATE CHANGE

3. www.financialworld.co.uk February / March 2016 53
22m more jobs globally than the
fossil fuel industry.5
Both factors are
particularly relevant to developing
countries because more jobs would
contribute to economic growth
and poverty alleviation. More
importantly, it is relevant because
most of the health and climate control
costs that would be expected to come
with a failure to tackle climate
change would fall to the most
vulnerable and least resilient
developing countries.
From a geopolitical perspective, it
makes sense for developing countries
to wean themselves off fossil fuel
imports, both to reduce their
dependency on others and to lower
exposure to geopolitical tensions.
Because renewables can operate off
the grid, countries can also use them
to extend energy access to their most
remote areas. With regard to the grid, an
oft-quoted concern with renewables such as
solar and wind power generation is that their
supply fluctuates and can cause grid instability.
Such challenges are more procedural than fundamental,
however. Improved battery capacity, power to gas systems, smart
grid solutions and new sources of energy-generation, such as plant
roots, algae and magnetic fusion, are already on the market or under
development and could solve the intermittency challenges. It should
also be noted that although coal, nuclear and shale gas can support
steady power generation, they require regular supplies of water to
do so, which can be a problem in water-stressed regions. Some
areas may see greater benefit in having lower demands on their
water supply than in having a lower risk of power outages.
A quiet revolution in renewable energy is already under way.
But current commitments to the energy transition as set forth in the
INDCs are not sufficient to keep warming levels under 2°C – the
target set out in Paris. That is why there are calls for subsidies and
investments to be moved – gradually – from fossil fuels to
renewables; for tax breaks for the big polluters to be eliminated;
and for a carbon tax or another measure to put a price on the
externalities from high-carbon energy generation to be adopted.All
of this will require investment in R&D to speed up innovation in,
and further reduce the cost of, renewable and efficient energy
technologies.
Why should rich, developed economies support that? Because,
as the economist Joseph Stiglitz has noted, where companies are
assessed on the basis of both their balance sheet and their income
statement, countries only put together an income statement – GDP.
GDP, however, does not capture what the World Bank calls “the
accumulation and sound management of a portfolio of assets –
manufactured capital, natural capital and human and social capital”.
At the same time, long-term sustainable development rests on
the preservation of our ecosystem and so on the measurement of
how well it has been managed, which is why we need to apply
measures of wealth that go
beyond GDP, in particular
“natural capital valuation”.
This approach gives more
economic clout to the
developing countries where
many of the world’s most
important ecosystems, such as forests, are located. Natural capital
makes up 36 per cent of their total wealth, according to the World
Bank. How much natural capital developed countries have is a
trickier question to answer and is discussed in the World Bank’s
Little Green Data Book.
Although low-carbon development is technologically feasible and
economically attractive for the “global south”, the Paris climate deal
and its INDCs are only the beginning. All countries will need to
continue to sharpen their ambitions, intensify their targets
and raise the speed with which they implement solutions about
climate change.
Diana Kool is a post-graduate researcher in
environment,politicsandglobalisationatKing’sCollege
London. She worked for the director-general enterprise
andinnovationattheDutchMinistryofEconomicAffairs
to stimulate Dutch innovative solutions to global
challenges. More recently she worked at the Green
EconomyCoalitionasapart-timeresearcher.Sheisnow
involved in setting up an EU-wide conference featuring
innovations, which will take place during the Dutch
presidencyoftheEU inthefirsthalfofthis year
5. Hanna V, Mormann F, Reicher D (2015), ‘A tale of three markets:
comparing the solar and wind deployment experiences of California, Texas
and Germany’. Steyer-Taylor Center for Energy Policy and Finance, 17
November.
A quiet revolution in
renewable energy is
already under way